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Update on U.S Debt Ceiling and Possible Credit Downgrades

Raymond JamesChances are you’ve heard about the ongoing debate surrounding raising the U.S. debt ceiling and even more recently about Moody’s announcement that it could potentially downgrade its credit rating for U.S. Treasuries and other institutions linked to the U.S. government.

On top of that, Standard & Poor’s placed the U.S. on “CreditWatch Negative” based on the rising risk of a policy stalemate. The agencies themselves believe the risk of any payment default by the U.S. government is low, but increasing slightly.

Moody’s also placed on review for possible downgrade the Aaa ratings of institutions directly linked to the U.S. government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks. Also included are those securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the U.S. government or the affected financial institutions.

With all the uncertainty, I wanted to give you some perspective from the renowned investment professionals at Raymond James. 

  • Our fixed income team, for example, is following Standard & Poor’s closely because the agency has said it may downgrade the outlook for U.S. ratings even if the debt ceiling is raised, unless a “substantial and credible” deal is struck to put the nation’s future borrowing and spending ways on a more sustainable path. This, in turn, could have implications for AAA-rated municipal credits that are linked to the federal government or otherwise vulnerable to sovereign risk. At least 7,000 top-rated municipal credits may also be placed under review for possible downgrade if the U.S. government loses its Aaa grade, according to Moody’s.
  • Chief Economist Scott J. Brown, Ph.D., believes “it’s important to remember that the debt ceiling crisis is a manufactured problem. The U.S. must address its long-term budget situation and the debt ceiling has to be raised, but these are separate issues. Lawmakers can raise the debt ceiling right now if they want to, and worry about the long-term budget deficit later. Using the debt ceiling as a political bargaining tool is foolish.”

While we do not yet know what decisions will be made, rest assured that we are monitoring events closely to better gauge their potential impact on investors.

If you’d like to read the latest updates, please visit the Bond Market Commentary page on my website at www.frazierallen.com

Please let me know if you have any questions about these ongoing events or how they may impact your portfolio. I’d be glad to discuss them with you.

Important Disclosures

Past performance is not a guarantee of future results. There are special risks involved with global investing related to market and currency fluctuations, economic and political instability, and different financial accounting standards. The above material has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. There is no assurance that any trends mentioned will continue in the future. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Also municipal bonds may be subject to capital gains taxes if sold or redeemed at a profit. Investing involves risk and investors may incur a profit or a loss.

US government bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the US government.

Commodities trading is generally considered speculative because of the significant potential for investment loss. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Specific sector investing can be subject to different and greater risks than more diversified investments.

Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.

Material prepared by Raymond James for use by its financial advisors.

The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Data source: Bloomberg, as of close of business July 14th, 2011.

Frazier Allen
Frazier Allenhttp://www.raymondjames.com/frazierallen
Frazier Allen, WMS, CRPS, Financial Advisor with F&M Bank 50 Franklin Street | Clarksville, TN 37040 | 931-553-2048
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